US Market Report – week ending 4th January 2008
Stocks are pummeled in the first few trading days of 2008, resulting in one of the strongest market declines experienced since the 2000 Tech Wreck. The Finance and Retail sectors are trading at record lows, while Technology stocks relinquished the only hope Investors had for market stabilization. Economic data has investors now fearing an economic Recession in 2008.
In November and December of 2007, the S&P500 index had held support above 1,430 points. This support level was broken on Friday as the markets gave way to extreme selling pressure due to weakening Housing and Financial markets and fears that a Recession is looming in the coming 12-months.
Over the last 12-months, the
It began with the end of the Housing Boom. The first signs came from Construction companies, which have now been trending down for almost 2-years. This led to the recent CDO (Collateralized Debt Obligation) credit problems that the Finance industry has faced, and ultimately to the consumer who is now faced with higher Interest Rates, higher cost of living, a weakening stock market, a softening Housing market, and as of Friday, weaker Employment opportunities.
The Employment report was released on Friday, resulting in a weaker than expected figure for job growth. Non-farm payrolls increased a mere 18,000 in December compared to economists expectations of 70,000. At the same time, the Unemployment rate increased to 5.0%, up from 4.7% the previous month.
It was this final figure that was the trigger for the selling pressure seen on Friday. The markets were already weak, but a strong increase in the Unemployment figure (especially at Christmas time), is a sign that the economy is certainly on the verge of further weakness.
Further signals that a Bear market is on the horizon …
Analysis of the major indexes shows the greatest threat for a Bear market since the 2000 Tech Wreck. In one foul swoop, last weeks bearish activity has almost wiped out the minor gains made in 2007, and placed technical analysts on the verge of declaring a Bear Market.
Lower High points and Lower Low points since the market peak in October last year are clearly defined for the S&P500 index (considered the economic benchmark for the
The next step towards defining a Bear market will be a downward break of the low point that had formed in Feb/Mar 2007. If we find the markets continuing to trend downwards over the coming month, a breach of this level is highly likely, and would result in a “Change of Trend” situation.
The situation for the Russell2000 index, which FMR Analysts uses as our benchmark for market performance, accentuates the same activity. However, there is a greater expectation for a market fall when this index is analysed.
Strong resistance at the market peak of 850 points on the Russell2000 defined a level at which the Bulls were exhausted. Through 2007, there were 3 points where selling pressure had attempted to drive the markets down, only to find support around 750 points.
This had created a sideways trading range, which could be found at the top of a long-term upwards trend. This pattern could be considered a “Consolidation” pattern, and with the resulting downwards break over the last week, we have the alert for a “Change in Trend”.
Volatility confirms seller bias …
Regular readers of the FMR weekly market report will be aware of our association with the CBOE Volatility Index (VIX). This indicator is considered the “investor fear gauge” and is used as a confirmation of market sentiment.
Clearly, the markets are consumed with fear at the moment. The VIX indicator has risen from approximately 18.50 points to nearly 24 points in the last 2 weeks. At this level, the VIX is mid-range of its activity from the last 6-months. The 2 peaks which had formed during the strong downwards shifts of late 2007 form around 30 points, and if we find further selling pressure on the short-term, it is highly likely we will find this index trading back at these levels very shortly.
A week that failed to find any positive economic activity …
Following the New Years Day closure of the markets, investors and traders were welcomed back with some extremely important economic news. On Wednesday, the release of the FOMC (Federal Open Market Committee) minutes from their December meeting on Monetary Policy (Interest Rates) was a major focus.
Through the rest of the week, data for Auto & Truck Sales, Manufacturing data, Factory Orders, Durable Goods Orders, and a rising Crude Oil were all factors leading to selling pressure in the markets. Following is a brief summary of those influences:
- FOMC minutes: failed to ease investors fears for a Recession
- Auto Sales: missed expectations, fuelling concerns over Consumer Spending
- Manufacturing: decreased in December, with ISM Index falling from 50.8 to 47.7 (below 50 suggests a “contraction” in manufacturing).
- Services Sector: grew at a decreasing rate from the previous month
- Crude Oil: traded above $100 a barrel.
Investors will be wanting some respite from economic reports over the next week, but are not likely to find it. Both Monday and Wednesday are clear of reports, however, on Tuesday will be the release of Pending Home Sales and Consumer Credit data. On Friday, Import/Export Prices, the Trade Balance and Treasury Budget may also fuel economic fears.
Earnings season looms …
Looking ahead over the next month, 4th quarter 07 Earnings results will officially begin with the release of AA (Alcoa’s) results after market close on Wednesday. Although the first week will be relatively quiet, the following few weeks will find a plethora of earnings reports reaching the newswires.
Earnings season is always exciting, but none more then this quarters’ releases.
Results from the previous earnings reports failed to inspire confidence in the business sector. Many reports failed to meet expectations, while there were many others that had previously been downgraded prior to their reporting.
So the big question for the coming few weeks is whether businesses have been able to improve their profitability over the last few months, or whether there is a greater sign that an economic Recession is looming ahead?
FMR Analysts Outlook …
FMR Analysts is expecting this earnings season to create a great deal of volatility in the markets. We are not confident that investors will be pleased with the overall results that will be presented in the coming weeks, which has a high probability of resulting in further bearish market activity.
The Retail sector has failed to tout strong results from Christmas Shopping. And a week later, there is still a great deal of uncertainty as to whether this has been a strong spending season for consumers. Do not be surprised to see poor results over the coming weeks from this sector.
Finance continues to be the burden on the markets, and the economy. There is nothing positive to read about this sector, and the outlook is just as poor. With Central Banks pumping cash into economy’s around the world, and with Billions (almost Trillions) of dollars being written off by institutions, this surely has to have a negative affect on company earnings.
Energy, however, may be one of the saving graces for investors. With higher energy costs and continued high consumption, this sector has remained steady during the last several months, despite broader economic fears.
All signs suggest further Bearish activity over the medium-term, however, which is the outlook FMR Analysts will maintain for the time being. Depending on economic results this week, we may find some mild buyer relief, however, any investor who perceives this as a “buying opportunity” will be putting their capital at a very high risk.
FMR Strategy Analysis …
Traders: Short-term Bearish strategies should be adopted. Any minor/mild market rallies should be viewed as “counter-trend” activities, and subsequently monitored for Bearish reversal patterns.
Investors: Likewise, investors need to adopt Bearish and/or Protection Strategies. For a number of weeks, we have been reiterating the point that Investors should be downsizing their market exposure or adopting Protection strategies where feasible. With turbulent times ahead, and a high probability of further market decreases, it will be a testing time for any investor holding stock positions.
Option Writers: Following our recent declaration of switching to Covered Put Writing, investors should now be seriously considering their option writing portfolio. Covered Call positions will have lost (be losing), on capital value. Exiting positions until the markets have bottomed out is typically the safest strategy to adopt in this scenario. Chasing option premium on falling stocks is not a sound strategy, especially if you need to adopt a Rolling up strategy at a later date. Exit positions and patiently wait for a return of Bulls in the future. Needless to say, Naked Put writers should be completely out of this market as the Risk is far too high to hold positions in this strategy.
